Inside Health

Drug Middleman Plans Hostile Bid For Larger Rival

By ANDREW ROSS SORKIN; Michael J. de la Merced contributed reporting.

Published: December 18, 2006

In an audacious takeover bid that could lead to lower drug prices for consumers, a company that manages employee drug plans will make a $26 billion hostile bid for a much larger rival, according to people briefed on the offer.

The bid by benefits manager Express Scripts for rival Caremark Rx tops a competing offer by the CVS drugstore chain in a bold move that evokes memories of the big buyout deals of the 1980s.

Pharmacy benefit managers act as the middleman between drug companies and employers that offer drug subsidies to their workers as part of health-care coverage. By acquiring Caremark Rx, which is double its size, Express Scripts would by far become the largest pharmacy benefits manager in the nation.

Together they would have even more clout when negotiating prices with drug makers for clients, typically big corporations and their employees. The deal would also save the combined company as much as $500 million a year by reducing overlapping costs.

Both pharmacy benefit managers and drug makers are under increasing pressure to keep drug prices low from all sides. Prices offered at the pharmacy counter have also come under threat in recent months by Wal-Mart, which said it would offer certain generic drugs for $4.

The takeover bid seeks to scuttle Caremark Rx's agreement last month to merge with CVS, the second-biggest drugstore chain in the country. That deal was expected to transform the drug industry.

Spokesmen for Express Scripts, Caremark and CVS could not be reached for comment.

The four largest prescription benefit mangers -- Caremark, Medco Health Solutions, Wellpoint and Express Scripts -- handle about 75 percent of the $235 billion spent on prescription medicines every year.

The takeover bid comes amid a record-setting year for mergers. As of the beginning of this month, there have been $3.3 trillion worth of deals in more than 32,000 transactions, according to Thomson Financial. Not since the days of the corporate raiders of the 1980's, as captured in films like ''Wall Street'' and books like ''Barbarians at the Gate,'' have deal makers been so central in reshaping corporate America.

The bid will pit Express Scripts, with a market value of $9.3 billion, against the much-larger CVS, worth some $25 billion, in a battle over Caremark Rx. It is possible that a bidding war could ensue, with both suitors ratcheting up their offers. Any deal could face scrutiny from regulators in Washington.

The offer by Express Scripts is a throwback to the 1980's in two ways: it is a rare hostile bid that could spark a fierce bidding war, and it relies heavily on debt, some $14 billion.

Buyers do not like to get into bidding wars: they can get expensive quickly and they can drive away important employees and customers, eroding the value of the business they want. Even as merger activity has accelerated, the number of deals in the United States that had two or more bidders has fallen sharply this year, according to Thomson.

But companies are increasingly willing to use debt in deals. The $26 billion offer is a vivid illustration of the role that cheap credit is playing in fueling the explosion in takeovers. Historically, low interest rates and a flood of available cash have enabled private equity firms to buy out bigger and bigger companies.

In those cases, the firms typically put up a quarter or so of the value of the company and borrow the rest, planning to use the companies' revenues to pay off the loans. And even as the amount of debt used in these deals has risen to record levels, investors have stayed sanguine that the risks of default are low.

Now, Express Scripts is using the same weapon employed by private equity and leveraging itself or borrowing against the combined company to try to win Caremark. Other companies have also drunken deeply from the debt pool: the mining giant Freeport-McMoran Copper and Gold is essentially borrowing $15 billion to pursue its $25.9 billion takeover of Phelps Dodge.

The takeover bid by Express Scripts is being orchestrated by its chief executive, George Paz, who joined the company in 1998, as senior vice president and chief financial officer before becoming president in 2003 and then chief executive in 2005. Before Express Scripts, he was a partner at the accounting firm Coopers & Lybrand and then executive vice president and finance chief for Life Partners Group.

It is unclear how investors will react to Express Scripts' offer. Express Scripts had widely been considered a takeover target, not an acquirer, because of its small size. Indeed, its bid for Caremark could also put it into play. Kemp Dolliver, an analyst at Cowen & Company, wrote in a research note after the CVS-Caremark announcement that Express Scripts could be bought by Walgreen, Wal-Mart or Aetna.

The proposed merger between CVS and Caremark received a mixed reception by investors. When it was first announced, shares in both companies tumbled, but they have returned to close to where they started after the deal. In that deal, Caremark received no premium for its shares. Shares of Caremark closed Friday at $50.30.

Under the proposed offer by Express Scripts, Caremark shareholders would receive just shy of $58.50 a share in Express Scripts stock and cash, people briefed on the offer said, representing a 22 percent premium. Exact terms of the breakdown between stock and cash could not be learned.

Under Mr. Paz, Express Scripts has made several acquisitions, most recently acquiring Priority Healthcare Corporation for $1.3 billion in cash in July 2005.

Express Scripts, with some 13,000 employees, was formed in 1986 and went public in 1992. The company is based in Maryland Heights, Mo.

In 2003, New York's attorney general, Eliot Spitzer, began an investigation into claims that Express Scripts had over billed the state's health care plans. In 2004, Mr. Spitzer sued the company in state court in Albany for breach of contract.